Mexico Central Bank Deputy Governor Sees No Rate Cut Case

By Eric Martin and Nacha Cattan -
Feb 27, 2013

Mexican central bank board member
Manuel Sanchez said he doesn’t see a case for the first
interest-rate cut since July 2009. The peso rallied the most in
three weeks and the benchmark stock index pared its gain.

“At this moment in time I don’t see a case for a rate
cut,” Sanchez said today in an interview at Bloomberg’s Mexico
City office. “I would like to see a better behavior of
inflation. The rigidity that inflation expectations have
maintained for many, many years away from the target, above the
target obviously -- this stubbornness worries me.”

Sanchez, who joined the five-member bank board that votes
on Mexico’s rate decisions in May 2009, said the Mexican economy
is growing at its full potential, and that if this continues
sooner or later demand pressures could appear. Monetary policy
should “remain vigilant” to risks including agricultural
shocks such as bird flu and financial weakness abroad that could
crimp investment in Mexican assets and hurt the peso, he said.

The peso rallied 0.6 percent, the most in three weeks, to
12.7652 per dollar. The benchmark IPC stock index pared its gain
for about two hours before rallying to close the day with a 0.7
percent advance.

‘Convergence Process’

Banxico’s board signaled a willingness to trim borrowing
costs in a statement accompanying its latest rate decision on
Jan. 18, after annual inflation slowed to within its target
range of 2 percent to 4 percent for the first time since May.
That was a shift from the November policy statement, when the
bank said it could raise rates if fast inflation persisted.

In the presentation of Banxico’s quarterly inflation report
on Feb. 13, central bank Governor Agustin Carstens, who leads
the board, said the bank may cut rates “if we keep advancing in
this convergence process, and it’s shown that we have inflation
each time closer to 3 percent in a more sustainable way.”

“We would like, with time, to see a greater convergence in
inflation toward 3 percent,” he said.

Inflation tumbled to a 15-month low of 3.25 percent last
month, down from 4.77 percent in September yet still above the
central bank’s 3 percent target. Consumer price increases neared
that target in 2011 and last touched it on a monthly basis in
2006. The inflation rate accelerated to 3.47 percent in the
first half of February.

‘Few Months’

Sanchez today disputed the Banxico majority view that
inflation is converging toward the target, echoing remarks
prepared for a Feb. 20 speech in Mexico City that said
“convergence of inflation to the permanent target demands more
than a few months of good results.”

Sanchez today wouldn’t predict how he’ll vote in the next
rate decision scheduled for March 8. Interbank futures contracts
have been showing traders are betting Banco de Mexico will cut
the interest rate from a record-low 4.5 percent. Nineteen of 20
economists in a survey by Citigroup Inc.’s Banamex unit
published Feb. 20 expect the board to lower rates this year.
Inflation will end the year at 3.67 percent, according to the
median economist estimate in the survey.

Analysts project a 50 basis-point interest-rate cut by
April, according to the median estimate in the survey. In the
previous poll they forecast a change in rates in January 2014.

Not March

“There’s room for a cut, but not in March, not yet,” said
Gabriel Lozano, chief Mexico economist at JPMorgan Chase & Co.,
who forecasts the central bank to cut rates by 50 basis points
in June. “They need to confirm that inflation is going down
before acting.”

While Banxico hasn’t had a split decision among its members
since it began publishing minutes from monetary policy decisions
in February 2011, reaching a consensus isn’t a “prerequisite”
for a rate decision, Sanchez said.

Lozano said that after Sanchez’s comments he thinks it’s
more likely that “we might see something in terms of non-
unanimous voting” at the central bank, although not in March.

The departure of Jose Julian Sidaoui from the central bank
board when his term ended last year left Sanchez as the member
with the biggest reputation for being a “hawk,” or the member
most focused on price stability, Gabriel Casillas, the chief
economist and head of research at Grupo Financiero Banorte SAB,
said in a Feb. 25 interview.

Banorte maintained its forecast for a rate cut in March
even after Sanchez’s comments today, economist Delia Paredes
said in an e-mail.

‘Transitory Shocks’

The decline in the inflation rate was helped by
“transitory positive shocks,” Sanchez said today. The cost of
mobile telephone services tumbled 39 percent in November and
December, helping bring down inflation, before jumping 21
percent in January. Increases in egg and poultry prices that
lifted inflation in the middle of last year have also eased.

Today’s remarks “paint Sanchez as one of the more hawkish
members of the Banxico committee,” said Enrique Alvarez, the
head of Latin America fixed-income research at IdeaGlobal in New
York. “What Sanchez is saying now is that there is a position
within the Banxico committee that perhaps is not as willing or
as convinced that it’s the right time to lean heavily in the
direction of a rate cut, which is surprising if you evaluate the
latest figures to come out of Mexico.”